U.S. SEC Emergency Rule to Curb 'Naked' Short Sales

Tuesday, July 15, 2008; 2:40 PM

WASHINGTON - The U.S. Securities and Exchange Commission will issue an emergency rule later Tuesday to stop "naked" short selling in major financial firms, including Fannie Mae and Freddie Mac, the SEC said.

Short sellers borrow shares they consider overvalued and sell them. If the price drops, they repurchase the shares, return them and pocket the difference.

In a naked short sale, the investor sells stock that has not yet been borrowed. Sellers sometimes deliberately fail to deliver securities as part of a scheme to manipulate the stock price.

The emergency rule would require any person making a short sale in the listed securities to borrow the securities before the short sale is effected and deliver the securities on the settlement date.

The SEC has already proposed rules to curb naked short selling abuses and prevent market price manipulation.

(Reporting by Rachelle Younglai; Editing by Tim Dobbyn)

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